Are You Aware of the Improving Trade Balance?

Anytime somebody tries to make a political or economic point about trade policy and rising trade deficits, just check to see if they mention oil imports as a factor. If they don’t, they’re not giving you the straight story.

New economic figures point out what’s really going on. The Commerce Department reported yesterday that the economy rose an an annual rate of just 0.6 percent in the fourth quarter of 2007. For the year overall, the GDP increased by 2.5 perent in 2007 on a Q4/Q4 basis.

One bright spot in yesterday’s report was a continued improvement on the trade front, thanks to a realigned (lower) dollar and solid economic growth abroad. For the year overall, U.S. exports increased 7.7 percent, more than five times faster than the 1.4 percent rise in imports. Exports accounted for 40 percent of economic growth last year, the most in a dozen years.

With exports growing faster than imports for three consecutive years, the trade deficit has begun to narrow. After peaking at -6.2 percent of GDP in the fourth quarter of 2005, the trade deficit declined to -5.2 percent of GDP by the fourth quarter of 2007.

While this decline is noteworthy, it masks an even greater improvement. Because our economy relies heavily on imported oil, the rising cost of a barrel of oil has become a major factor in the U.S. the trade deficit. In the fourth quarter of last year, petroleum imports alone accounted for the majority (55 percent) of the entire U.S. trade deficit. Outside of petroleum imports, the U.S. trade deficit has already narrowed by 40 percent over the past three years and now, at 2.3 percent of GDP, stands at its lowest level since 1999 (see chart).